Companies should plan even further ahead as global supply chains are expected to remain under pressure this year, advises a global think tank.
ING Think in a new report said global merchandise trade faces many headwinds this year as global supply chains remain under pressure amid the war in Ukraine, China’s zero-COVID policy, and delays and protracted supply shortages.
The organization said goods logistics is seen to enter a phase of moderation as delays, rerouting, high transport costs, and lower consumer demand all weigh on trade.
It linked the moderation to a number of factors. For one, while global shipping schedule reliability continues to improve slowly, it remains below 2021 levels and is not expected to improve much further.
“With traffic jams having increased significantly in Chinese ports due to the zero-Covid policy in China, and in the North Sea due to the war in Ukraine, we don’t expect global schedule reliability to improve much further from here just yet,” the analysis added.
Moreover, while congestion at the Port of Long Beach on the US West Coast improved noticeably in the first months of the year, pressure is expected to mount again in the next couple of months due to the increasing number of vessels waiting to berth outside Chinese ports, particularly in Shanghai.
Material and labor shortages add to the existing material bottlenecks caused by the pandemic, while sharply increased prices make it difficult for manufacturers to calculate accurately for this year and to commit to prices for delivery to clients much later. As a consequence, average transport rates remain elevated, contributing to higher prices for producers and consumers on top of elevated energy prices.
ING Think said that the world still faces a problem of undercapacity, mostly from the supply side, and that supply chain disruptions are not expected to ease substantially this year given the extremely volatile environment.
“Although softer demand from China, the EU and the US will ease the pressure on stretched supply chains, the current backlog is enough to keep supply chains strained throughout the year. We expect these headwinds to result in trade growth of somewhere between 1% and 2%, in our base case,” it said.
The report posits that permanent trade flow shifts are likely to occur as a result of the war in Ukraine. There is already some re-routing underway for grains and energy products, for example. India, the second biggest wheat producer after China, but not a major exporter, has stepped up its exports as Indian producers tap into the surging food prices.
Adding to shipping woes is the expected temporary bypass of trade routes affected by the Ukraine war, which is resulting in longer transportation times and higher costs. In addition, the closure of airspace leads to new capacity reductions. Russian freighters are being dropped out of global service, and routes between Europe and destinations in Korea and Japan are being redirected to avoid Russian airspace, meaning longer hours and possible stopovers, which once again leads to inefficiency, new capacity pressure and higher costs. All of this results in higher prices, ING Think said.
Another trend, which will now gain further momentum, is the shift towards more self-sufficiency. “The pandemic has already kickstarted this process, with the European Union for example introducing the European Chips Act in order to secure sovereignty in semiconductor technologies and applications,” the report said.
Ultimately, the war in Ukraine might result in a new world economic order, being characterized by more “friendshoring”—trading relationships with countries that have long-standing relationships, cooperation and share similar values might become more valuable. Ethics may also become a more important consideration in trading.
“Overall, conditions for international trade remain very tough and the low costs and perceived low risks (both political, and logistical) which helped to support the development of global supply chains have become sources of uncertainty. However, these supply chains remain intact for now. It’s more about rerouting, diversification in suppliers and/or regions, more stockpiling, and inventory building,” ING said.
It said importers are now considering options to mitigate supply risks and improve supply chain reliability through buffer stocks, multi-sourcing, nearer sourcing and other actions, but this is a slow process and these alternatives could prove to be more expensive. “Right now, it is a matter of planning further ahead than ever before.”